On Tuesday, October 9th, Eastern Time, Anbang's chief economic advisor, Mohamed El-Erian, said that due to the huge fog surrounding the prospect of a Fed rate cut, the guessing game about the Fed's monetary policy path is causing massive market fluctuations.

The Federal Reserve's interest rate cut path has turned into a guessing game.

In September this year, the Fed made its first interest rate cut in four years, with a sharp 50 basis points cut. However, last week, the strong September non-farm payroll report was released, causing Wall Street traders to quickly reduce their bets on a significant rate cut by the Fed.

Since last Friday, with the sharp drop in expectations for rate cuts, the benchmark 2-year and 10-year U.S. Treasury yields have broken 4% for the first time since August last year.

CME's FedWatch tool shows that after the non-farm payroll report was released, the probability of a 50 basis point rate cut by the Fed in November dropped from 30% to 0%. At the same time, the market expects a 86.7% probability of a 25 basis point cut by the Fed, and a 13.3% chance of no cut.

"The market is very chaotic. In the past 15 days, the likelihood of a 50 basis point rate cut in November has dropped from over 60% to zero. And next month is November," El-Erian said. "This is the uncertainty that exists in this market. These are all significant changes based on data points."

El-Erian said that ideally, the Fed's policy guidance should reduce market volatility, but since 2021, the Fed's communication has instead "amplified" market volatility, "We are now living in a strange environment."

"When it comes to how to view interest rates, this market lacks an anchor," El-Erian said. "This volatility will continue until we restore some stability."

This week's CPI data will be crucial.

El-Erian stated that inflation and employment data will both drive the Federal Reserve's decisions. On Thursday, the US Bureau of Labor Statistics will release the September Consumer Price Index (CPI), which means that traders will once again face another key data to digest after the nonfarm payroll report.

He mentioned that although the current pressure of rising prices in the US is expected to ease, any unexpected CPI data could once again disrupt market expectations for inflation and employment, leading to significant market turbulence.

In fact, on Sunday US Eastern Time, Bank of America also expressed a similar view that a sharp increase in US CPI could trigger a round of market turmoil.

"Following the successful release of the nonfarm payroll report last Friday, we believe the importance of this week's CPI has increased," said Bank of America analyst in the report, "a significant surprise could bring uncertainty to the (Federal Reserve) easing cycle and bring more volatility to the market."

They pointed out that options pricing indicates that when the CPI data is released this Thursday, the S&P 500 index will experience a 109 basis point fluctuation, slightly higher than a 1% swing. This would exceed the three-month average volatility of 70 basis points on the day of the previous CPI release, and it will be the largest volatility related to a CPI report since May.

UBS economist Brian Rose also wrote in the report: "The September CPI will be a key data point. If the rate of price increase is faster than expected, coupled with strong employment data, the possibility of the Fed not cutting interest rates in November will increase."

Editor/ping